Thursday, May 28, 2015 11:24:05 AM
RATIONALE
"Companies pull off reverse splits to keep their stock prices out of the cellar. In part, it's aesthetics and public relations: A stock price in the pennies-to-a-few-dollars range just looks bad. But there are also practical reasons: To remain listed on a major stock exchange, a company usually has to maintain a stock price above a certain level, often $1. In 2009, for example, financial giant American International Group was in danger of being pulled off the New York Stock Exchange when its stock fell below $2. The solution: a 1-for-20 reverse split that boosted the price above $20. In 2011, Citigroup executed a 1-for-10 split that took its stock from around $4.50 a share to about $45 literally overnight."
REACTION
"Charles Kaplan, president of the investment consulting firm Equity Analytics, told Bankrate.com, "It is usually a very negative sign when a company reverse splits their stocks." But how the market reacts often depends on what else the company is doing to reverse its fortunes. If it simply declares the reverse split and goes on with business as usual, investors may see the split as nothing more than a smoke screen, and the price may go right back to falling as they sell their shares. But if the split is accompanied by serious changes in management, structure or strategy, investors may give the company more time to right the ship."
Source: http://finance.zacks.com/reverse-stock-split-good-bad-2298.html
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